Dow Chemical (a U.S. MNC) and Michelin (a French tire manufacturer) need to borrow to finance their foreign direct investments. They can issue 10-year bond of $220 million or 10-year bond of 200 million. Although both companies have the same creditworthiness, they have to pay higher interest rates for the debt denominated in foreign currency. Their borrowing costs are as follows:

$ Borrowing Cost Borrowing Cost

Dow Chemical 7.5% 8.25%

Michelin 7.7% 8.10%

A swap bank currently quotes the following rates on 10-year swaps:

U.S. dollar ($): 7.5% - 7.6% against dollar LIBOR

Euro (): 8.1% - 8.15% against dollar LIBOR

1. Discuss the challenges encountered by the above two MNCs in financing for their foreign direct investments.
2. Illustrate how both the MNCs benefit from the use of currency swaps.
3. Suppose two years after both companies entered into the 10-year currency swaps, $ interest rate has changed to 7% and interest rate changed to 8%. Exchange rate changed to $1.2/. What is the value of the currency swap?

Please Complete ALL Parts!!!